• UK could reap over GBP 5bn to help shrink GBP 22bn financial blackhole
• Could sell gradually through several block trades or all at once with fully marketed follow-on

The UK’s new Labour government is scratching its head on how to fill what it calls “a financial black hole” of GBP 22bn left by the Conservative administration it defeated in the country’s general election in early July. But the impact of what UK Prime Minister Keir Starmer has warned will be a “painful budget” in October could be mitigated by larger sell-downs of NatWest Group [LON:NWG] through the equity capital markets.

As of 30 August, 2024, the UK government held 17.97% of NatWest Group after selling a chunk of shares in the open market, according a regulatory disclosure.

The latest sale was part of a dribble-out of shares, but this is a gradual process with a drip-feed of proceeds into government coffers. If the budget gap is as large as the government makes out, it should consider greater stake sales to plug that gap.

NatWest has a market cap of around GBP 28bn, which would value a government’s stake at about GBP 5bn – over a fifth of the supposed hole in the UK’s public finances.

Previous NatWest/RBS sell downs

Source: Dealogic as of share price close on August 28 

A block trade to institutional investors looks like an obvious, and more efficient, way to dispose of the government’s remaining stake, particularly after UK Chancellor Rachel Reeves in late July cancelled plans to sell NatWest shares to retail investors.

Several bankers and investors speaking to this news service said they wouldn’t be surprised to see a NatWest follow-on sooner rather than later – a sentiment that was held even before the UK election and the cancellation of the retail scheme.

NatWest’s shares are up more than 50% since the last time the government sold part of its holdings in May 2021, and have gained around 54% YTD, reversing a large drawdown in the stock last year. The share price is almost 70% higher than where it was five years ago.

Banks remain in vogue among equity investors, with bank privatisations, particularly popular. European governments still hold big stakes in some of the continent’s financial crown jewels.

Bank privatisations this year

Source: Dealogic

The Irish model

Ireland’s privatisation of AIB Group [DUB:A5G], the holding company for Allied Irish Banks, have been heralded by investors for several years as one of the best state sell-down programmes in Europe. As previously reported by this news service, the Irish government has been widely lauded for its transparency and willingness to accede to the market on price, rather than pushing a deal into the market after a competitive risk auction, with banks bidding to underwrite the stock at the tightest price.

The government has chosen to be deliberative in ensuring investor comfort, which has eased the receptiveness to future sales.

That said, Ireland has not had to be a price taker on its deals, with the most recent trade in June being priced at a 2.78% discount, a ratio of -0.56x the stake sold as measured by this news service’s Price of Liquidity ratio model. Any sale inside -1x the size of the stake sold is historically an attractive one for the seller.

The Greek Approach

Alternatively, the UK government could potentially sell its entire NatWest stake in one go, using a fully-marketed deal structure like Greece did with its EUR 1.4bn sale of 27% in Piraeus Financial Holdings [ATH:TPEIR].

A source close to that deal told this news service at the time that the structure allowed the Greek government to do a far larger sale of the bank at a tighter price. The trade came at a 0.35% premium to the closing price before the trade, resulting in a very rare positive PoL ratio.

While there is no guarantee that the UK government would get a similar result in a NatWest sale, the structure shows that it would be possible to shift its entire stake in a single trade, should it wish to. This would allow the Chancellor to recoup significant funds to aid in filling that GBP 22bn hole somewhat.

The government might continue to dribble-out NatWest shares into the market, as it has done over the past few years, but if it wishes for a big boon soon there are options available.

A spokesperson for the UK Treasury said the UK government “will continue to use existing disposal methods to deliver value for money sales and expect that a full exit from the NatWest shareholding will be achieved by 2025/26, subject to market conditions.”

by Sam Kerr